EDITOR'S NOTE
Friday was a crazy exciting markets day, with pandemic stocks plunging and reopening trades rallying thanks to Pfizer's amazingly effective Covid pill--and then a stronger than expected jobs report. I wasn't even looking at bond yields until I thought I heard Carl Quintanilla say the 10-year was at 1.45%. I sat there for a moment, thinking I must have misheard him and he'd actually said 1.55%, which still would have seemed low. But I decided to check the app just in case, and sure enough--there was the 10-year, staring back at me at 1.45%.
Turns out I wasn't the only one taken by surprise. "That was quite the Treasury market performance on Friday," David Rosenberg wrote drily this morning, adding it also came in the wake of the Democrats passing the infrastructure bill--which includes $550 billion in new spending, only half of which is paid for over the next ten years. In other words, it will grow the deficit by another $256 billion over the next decade, according to CBO--and Treasury yields still dropped the next day.
So why did yields decline, despite a trifecta of reasons for them to break out to the upside? There are always the usual suspects, like a short squeeze. Remember, an upward squeeze in bond prices means a drop in yields. And sure enough, CFTC data this morning showed that "speculators were most net short U.S. 10-year futures since 2020," as of last Tuesday. "Seems like an exhaustion move," wrote Andrew Brenner of Natalliance to clients.
But is there more to the story? This all may seem rather arcane except that it underpins the behavior of the entire stock market. Weren't financials supposed to run higher into year-end? Instead, the XLF ETF has stalled out at $40 since October 20th. Meanwhile, Cathie Wood's ARKK innovation ETF is up 4% in the same period.
Indeed, Michael Darda points out that the 10-year yield has actually been on the decline since it peaked at 1.7% back on October 21. Since that date, the market's inflation expectations have dropped, and rate hike expectations have fallen by about 17 basis points. Why the change? "We are not sure," wrote Darda this weekend, though Fed pushback, the Democrats' stalled multi-trillion dollar spending bill, and China slowdown concerns could all be factors, he said.
One additional factor is the behavior of global bond yields last week. Britain shocked the world last Thursday by not hiking interest rates--and one-year British yields fell by half, their biggest daily move since 2009. (Their taper is already set to be complete by year-end.) The 10-year U.K. bond fell back below 1%, and it pulled down 10-year yields globally, including in the U.S. "November's biggest market theme to date is central banks remaining more dovish than bond traders," wrote Jim Vogel of FHN Financial earlier today.
And that dovishness got some help from U.S. earnings season, when the CEO of logistics giant GXO said last Tuesday that the supply chain crunch "we believe [is] very much temporary," and "will abate" as early as the first quarter of next year. So if you take Friday at face value as the "end of the pandemic" trade, then an easing supply crunch could mean less inflationary pressures and indeed lower bond yields than the market had come to believe.
If nominal growth slows and the excess savings aren't spent--or go into the stock market (or crypto), as Mr. Rosenberg argued on our show last week, then this may indeed be the whole story. If not, then rates should resume their rise again, and central banks may ultimately have to play catch-up. Which way it all plays out from here is anybody's guess.
See you at 1 p.m!
Kelly
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Senin, 08 November 2021
Well, that was a surprise
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